Working Paper: CEPR ID: DP14550
Authors: David Atkin; Benjamin Faber; Thibault Fally; Marco Gonzalez-Navarro
Abstract: We propose and implement a new approach that allows us to estimate income-specific changes in household welfare in contexts where well-measured prices are not available for important subsets of consumption. Using rich but widely available expenditure survey microdata, we show that we can recover income-specific equivalent and compensating variations as long as preferences fall within the broad quasi-separable class (Gorman 1970; 1976). Our approach is flexible enough to allow for non-parametric estimation at each point of the income distribution. We implement this approach to estimate inflation and welfare changes in rural India between 1987 and 2000, and to revisit the impacts of India's trade reforms. Our estimates reveal that lower rates of inflation for the rich erased the real income convergence documented by the existing literature that uses the subset of consumption with well-measured prices to calculate inflation.
Keywords: real income; inequality; nonhomothetic preferences; price indices; gains from trade
JEL Codes: F63; O12; E31; D12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| quasiseparable preferences (D11) | changes in household welfare (D19) |
| quasiseparable preferences (D11) | estimation of price indices (C43) |
| quasiseparable preferences (D11) | welfare changes (I38) |
| horizontal shifts in relative Engel curves (D11) | changes in price indices (C43) |
| lower inflation rates for wealthier households (E31) | real income convergence (F62) |
| lower inflation rates for wealthier households (E31) | divergence in welfare changes across income groups (D31) |
| India's trade reforms and inflation dynamics (F14) | welfare implications (I30) |